Gold a ‘Bubble,’ Much Steeper Declines Possible: MKM Partners

By Brendan Conway

In a note this morning entitled “The Real Bubble is Gold: and It’s Deflating,” MKM Partners strategist Michael Darda calls the yellow metal a “bubble,” warning of even worse pain ahead — at a time when the price of gold is already down by about 17% on the year:

Reuters

We believe the key sentiment shift for gold occurred when the gold rally failed despite the advent of QE3 from the Fed. Indeed, despite the fact that the gold bull market began nearly a decade before the advent of zero short rates in the U.S. and QE from the Fed, many investors simply took it at face value that gold was soaring and would continue to rise because of large increases in the U.S. monetary base, despite the fact that the TIPS market suggested the Fed’s QEs were simply offsetting a velocity shock, not sowing the seeds of an inflationary surge. What about the argument that eventually inflation will pickup and, at this point, the gold rally will continue? If inflation were to surge (an unlikely prospected with five-year TIPS breakeven spreads back below 200 bps, in our view), the Fed would almost surely be more aggressive/earlier in reversing QE, which, all things equal, would be dollar bullish and gold bearish. Indeed, it seems as if gold, after having run up to bubble like heights, has much more downside risk than upside potential, even after the recent rout.

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There are 9 comments

MAY 23, 2013 12:03 P.M.

ZDB wrote:

I hardly see anyone advocating owning gold, and I know few investors that have allocated anything to gold, and most that have allocated something are holding small positions (I.e. well under 10% of their portfolio). If almost nobody own any good, how can it be a bubble? Bubbles occur when too many people rush into an option, like the dot com, real state and Beenie Baby crazes, amongst many others.

MAY 23, 2013 12:08 P.M.

Reality wrote:

Most insane article I've read on the interenet in months. Did The Fed write this for you ?

MAY 23, 2013 12:42 P.M.

rdubz wrote:

This guys an idiot!

MAY 23, 2013 12:43 P.M.

Stockmsg wrote:

They are just trying to talk it down to get a position. Typically Wall St.

MAY 23, 2013 12:47 P.M.

varinvest wrote:

Gold is not in a bubble,the stockmarket is a bubble,multiple expansion,earningsgrowth,al bla bla bla,Bernanke is also smelling bubbles but he can't stop printing ,if he does the house of cards will collapse.

MAY 23, 2013 1:14 P.M.

mB wrote:

I own quite a bit. And will be buying more soon.

MAY 23, 2013 1:48 P.M.

Anonymous wrote:

... and on this grim news gold is rising a few percent today...

MAY 23, 2013 1:56 P.M.

tbone wrote:

Could someone please explain how a commodity can be categorized in a bubble when selling just above the average cash cost of production and selling below total cost of production ?

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